If real GDP and aggregate expenditure are less than equilibrium expenditure, an unplanned de-crease in inventories occurs. Firms increase production to restore inventories to their planned levels.The increase in production increases real GDP.
7) If real GDP and aggregate expenditure are greater than equilibrium expenditure,what happens to firms’ inventories? How do firms change their production? And what happens to real GDP?If real GDP and aggregate expenditure are greater than equilibrium expenditure, an unplanned increase in inventories occurs. Firms decrease production to restore inventories to their planned levels.The decrease in production decreases real GDP.5
8) What is the multiplier? What does it determine? Why does it matter?9) How do the marginal propensity to consume, the marginal propensity to import,and the income tax rate influence the multiplier?The multiplier is smaller when the marginal propensity to consume is smaller, when the marginal propensity to import is larger, and when the income tax rate is larger.10) How do fluctuations in autonomous expenditure influence real GDP?11) How does a change in the price level influence the AE curve and the AD curve?A change in the price level shifts the AE curve and creates a movement along the AD curve.12) If autonomous expenditure increases with no change in the price level, what hap-pens to the AE curve and the AD curve?Which curve shifts by an amount that is determined by the multiplier and why?A change in autonomous expenditure with no change in the price level shifts both the AE curve and the AD curve. The AE curve shifts by an amount equal to the change in autonomous expenditure.The multiplier determines the magnitude of the shift in the AD curve. The AD curve shifts by an amount equal to the change in autonomous expenditure multiplied by the multiplier.13) How does an increase in autonomous expenditure change real GDP in the short run?Does real GDP change by the same amount as the change in aggregate demand?Why or why not?In the short run, an increase in aggregate expenditure increases real GDP. The increase in real GDP is less than the increase in aggregate demand because the price level rises. The more the price level rises (the steeper the SAS curve) the smaller the increase in real GDP.
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